As Congress considers whether to allow tax rates, including those on capital gains, to rise in 2013, some state legislators are debating whether to change their state-level capital gains taxes.

One of those debates is in Oregon, which has one of the nation’s highest capital gains tax rates.

According to research by the Oregon-based Cascade Policy Institute and the Oregon Governor’s Council of Economic Advisors, the state’s capital gains tax has been a volatile source of income, and reducing or eliminating it could create thousands of new jobs.

In written testimony before the Oregon House Committee on Revenue, Steve Buckstein, a senior policy analyst and founder of the Cascade Policy Institute, argued reforming Oregon’s capital gains tax would likely spur economic development and attract new investment.

Benefits of Tax Cut

“Reducing or eliminating Oregon’s capital gains rate would send a positive message to business people and investors everywhere. It not only would unleash more economic activity from those already living in Oregon, it would help attract such people to relocate to Oregon and bring their capital with them,” he wrote.

Buckstein argues Oregon’s high tax rate deters businesses from moving into the state and may be encouraging businesses to locate instead in neighboring Washington, which has no capital gains tax.

“Oregon’s capital gains rate is the same as the rate on personal income,” he told Budget & Tax News. “The top rate is now 9.9 percent, compared to 0 percent in our neighbor to the north, Washington. While there is no comprehensive accounting of investment and taxpayers lost due to this high tax rate, it is common knowledge that Oregon tax accountants advise any clients facing large capital gains taxes upon the sale of their businesses to consider moving to Washington state or elsewhere first, to avoid such a penalty.”

Part of Package Deal

The Oregon legislature is considering lowering the capital gains tax as part of a larger tax proposal backed by three Democratic legislators: Sen. Mark Hass (D-Beaverton), Sen. Ginny Burdick (D-Portland), and Rep. Tobias Read (D-Beaverton). Their proposal would create a new retail sales tax in Oregon and cut personal income tax rates. The top income tax rate would be 6 percent. The effective tax rate on capital gains income would be cut in half.

Buckstein said the sales tax component could stop the bill from passage.

“Oregonians have voted down a state sales tax nine times,” Buckstein said. “It has never received more than a 29 percent yes vote, and that was in 1934. So the chances of this measure passing are low, but at least a cut in capital gains rates will be on the table.”